228 ACCOUNTING FOR MANAGERS
Only significant variations need to be investigated. However, what is significant
can be interpreted differently by different people. Which is more significant, for
example, a 5% variation on £10,000 (£500) or a 25% variation on £1,000 (£250)? The
significance of the variation may be either an absolute amount or a percentage.
A variance later in the year will be more difficult to correct, so variances should
be detected for corrective action as soon as they occur. Similarly, a one-off variance
requires a single corrective action, but a variance that will continue requires more
drastic action. A variance that can be understood can be corrected, but if the causes
of the variance are not understood or are outside the manager’s control, it may be
difficult to correct and control in the future.
Explanations need to be sought in relation to different types of variance:
žsales variances: price and quantity of product/services sold;
žmaterial variances: price and quantity of materials used;
žlabour variances: wage rate and efficiency;
žoverhead variances: spending and efficiency.
The following case study provides an example of variance analysis.
Variance analysis example: Wood’s Furniture Co.
Wood’s Furniture has produced a budget versus actual report, which is shown
in Table 15.2. The difference between budget and actual is an adverse variance of
£15,200. However, the firm’s accountant has produced a flexed budget to assist in
carrying out a more meaningful variance analysis. This is shown in Table 15.3.
The flexed budget shows a favourable variance of £3,300 compared to the
flexed budget. In order to undertake a detailed variance analysis, we need some
additional information, which the accountant has produced in Table 15.4.
Sales variance
The sales variance is used to evaluate the performance of the sales team. There are
two sales variances for which the sales department is responsible:
žThe sales price variance is the difference between the actual price and the
standard price for the actual quantity sold.
žThe sales quantity variance is the difference between the budget and actual
quantity at the standard margin (i.e. the difference between the budget price
and the standard variable costs), because it would be inappropriate to hold
sales managers accountable for production efficiencies and inefficiencies.
The sales price variance is the difference between the flexed budget and the
actual sales revenue, i.e. £45,000. This is calculated in Table 15.5. The variance is
favourable because the business has sold 9,000 units at an additional £5 each.
The sales quantity variance is the difference between the original budget profit
of £70,000 and the flexed budget profit of £50,500 – an unfavourable variance of